Is a solution in sight?

THE CPA AND INDEPENDENCE: ILLUSION OR REALITY?

In Brief

At "The CPA and Independence: Illusion or Reality?," a symposium sponsored by the New York State Society of Certified Public Accountants and The CPA Journal, constituents from groups that are a party to or otherwise benefit from the independent audit as part of the nation's successful securities markets discussed the issue of auditor independence.

Richard H. Walker, director of enforcement of the SEC, launched the symposium by identifying the issues that concern the SEC. The full text of Walker's remarks will appear in the May issue of The CPA Journal. William T. Allen, chair of the Independence Standards Board (ISB), gave his perspective on some of the perceived concerns of the SEC and others. Two panel discussions followed, both of which were moderated by Professor Gary J. Previts of Case Western Reserve University in Cleveland, Ohio. The first, comprised of SEC Associate Chief Accountant W. Scott Bayless, attorney Daniel L. Berger, New York Stock Exchange Senior Vice President James L. Cochrane, investment analyst Gerald I. White, and ISB Executive Director Arthur Siegel, introduced the issues. A second panel, which included AICPA Vice Chair Robert K. Elliott, Auditing Standards Board member Sally L. Hoffman, Public Oversight Board Chair A.A. Sommer, Jr., Union Carbide CFO John K. Wulff, and Siegel, explored possible solutions and raised some conceptual differences that need to be addressed.

The symposium established that the ISB has its work cut out for it. First, and perhaps foremost, the ISB must address the issue of appearance of independence versus fact of independence. The SEC strongly believes that appearance matters. Only a well developed conceptual framework that demonstrates how the fact of independence can be established and monitored will change the SEC's position. The beginnings of a conceptual framework are under way and will occupy much of the ISB's time in the immediate future.

New York State Society of Certified Public Accountants President George T. Foundotos opened the symposium with a comparison: "Independence is to the CPA what privilege is to the attorney. Without privilege, the attorney is merely a manipulator of words and a shuffler of paper. The CPA without independence is a manipulator of numbers and a shuffler of paper."

The SEC Identifies the Issues

In his prepared remarks, SEC Director of Enforcement Richard H. Walker made it abundantly clear what he perceives as the major issue facing the Independence Standards Board as it begins full deliberations: "Investors know that they can trust our auditors because they are--and of equal appearance--they appear to be independent." He went on to say that it is not enough that the numbers are right; public investors must also perceive that the numbers are right. He demonstrated that the notion of appearance of independence is grounded in auditing standards and SEC rules and regulations.

Walker noted two forces that present new challenges to auditor independence: escalating competition to obtain and hold onto auditing business, and potential conflicts of interest as the major accounting firms offer "a literal supermarket of nonaudit services."

"These concerns are not just a matter of speculation but are what we're seeing in our investigations," Walker said. He mentioned a specific case where partners in a major office of a big firm were buying and selling securities of large corporations that were audit clients of that office and other offices of the firm. He did not disclose the identity of the firm, but according to a recent SEC news release, PricewaterhouseCoopers agreed to establish a $2.5 million fund for educating auditors on independence issues as a result of an SEC action that found partners in one of its offices owning securities in
audit clients.

Walker touched upon the subject of consolidation and alternative practice structures, noting that "the possible number of combinations between accountants and other business services providers is endless." He speculated on the independence issues raised by these structures, posing the following question: "What do we say when 1) lawyers in one part of a firm are ethically bound to advocate a client's interests zealously and to hold information obtained from the client in the strictest confidence; while 2) accountants in another part of the firm are ethically bound to exercise skepticism in dealing with the client's management and must show primary allegiance to the public by disclosing damaging confidential information about the client; while 3) consultants in another part of the firm are giving the client management advice, the results of which may be reviewed during the audit; and while 4) others in the firm are trying to sell expensive new goods and services to the client?"

Are there ways to allay the SEC's concerns? That is the ISB's major challenge. Walker was pleased to observe that ideas are starting to flow, but at the same time he expressed concern about the idea of using materiality concepts in assessing auditor independence. This is a road that he suggests the profession not take.

"As you consider all of these ideas," Walker concluded, "we at the SEC would urge you to consider each proposal from the investors' point of view, as well as from the auditors' point
of view."

ISB Chair William T. Allen

Independence Standards Board Chair William T. Allen spoke from the perspective of, in his words, "a student of the field." The ISB was established in October 1997 to address the kinds of concerns identified by Walker and to codify, clarify, and conceptualize the rules and principles of independence that presently exist for auditors of public companies. It took well over a year for the ISB to become operational--to hire a staff, acquire appropriate facilities, and educate the four public members of the board--and prepare for the serious work ahead of it. The board recently approved its first official pronouncement, which will require the auditor to discuss independence with the audit committee annually based upon a written communication of all relationships between the auditor and the company that might bear on
independence.

Allen raised another issue that he feels will create tension as the ISB moves forward to satisfy its mandate. On the one hand, the SEC is concerned that structural changes in the profession threaten auditor independence. On the other hand, the profession sees an arcane, labyrinthine, and frustrating set of rules and regulations that makes administration of independence costly and difficult. Moreover, the profession perceives auditor independence as so important for its success that it will take the necessary steps to protect it.

Allen admitted the board's unusual consistency as a professional standards setter--four of its members are not accountants--has resulted in a loss of efficiency. Will the board's final work be better in the long run because of its makeup? Allen did not suggest it necessarily would be. But the conceivers of the board are convinced that the resulting standards will be perceived as possessing more objectivity and integrity because of the board's makeup. The issue of appearance, and the SEC's not-so-invisible hand in the process, are readily evident.

Allen commented upon the transformation that the profession is presently experiencing: "Firms have become colossal in size as they deliver knowledge-based services. Their prime motivating factor appears to be commercial success. Something seems to be dying, while something else is being born."

Allen said that he is not "sentimental" about the changes that are occurring vis-à-vis the profession as it was once known. Whether good or bad, desirable or undesirable, the changes need to be evaluated in terms of the public good, including their ability to
contribute to the financial system's overall health.

Allen also noted that the value of audits in the marketplace may be declining because of a decline in the relevance of financial statements themselves. He observed that accounting theory is not doing a very good job with know-how and intellectual property, the assets that are fueling today's securities markets.

Panel Discussions

Moderator Gary J. Previts, professor of accounting at Case Western Reserve University, led the panel discussions. The participants were various major players in the financial reporting game.

Disclosure as a Solution. New York Stock Exchange Senior Vice President James L. Cochrane stressed maximum disclosure as the key to an effective system related to independence: "If I know all there is to know about a director or an auditor I can determine whether independence exists." Under the existing system, according to Cochrane, it is very difficult to assess the objectivity and independence of a member of a board of directors or audit committee. He contrasted the independence of his brother as a member of his own theoretical board with one of his longtime business associates with no direct connection to him. The former--although in fact very independent-minded--would not pass the appearance test, while the latter, possibly because of prior business dealings, might be very accommodating to his wishes. Cochrane would turn loose the directors' and officers' liability insurance carrier, the financial analyst, and the media in order to determine whether a company is playing games based upon disclosure requirements. "We need sunshine on the process."

Keep the Rules Simple. Cochrane said that the New York Stock Exchange sees a dichotomy in trying to set appropriate rules of corporate governance: Should the rules be comprehensive and detailed, or simple and based upon principles? In 1992 and 1993, the NYSE worked on a comprehensive definition of independence for a member of a board of directors. At one point the list of do's and don'ts reached 22 pages. It was ultimately decided to use only a simple definition. That, according to Cochrane, is the path that the ISB should follow.

The View from the Plaintiffs' Bar. Attorney Daniel L. Berger sees the real independence issue as the failure of an audit partner to make tough decisions in cases where, for a variety of reasons, the auditor cannot maintain the independence of mental attitude required to protect the public interest. One example he gave involved revenue recognition in a foreign subsidiary. The foreign auditors discovered improprieties and reported them to the national office. But with the prospect of making up for a deeply discounted audit fee through lucrative consulting services, the firm found a way to finagle the answer in favor of the client.

Berger recalled another incident in which the auditors challenged a revenue recognition practice just before the company was seeking to take its stock public. After five or six months of haggling, the auditors acquiesced. The company was the major client of the partner and the office; the firm saw tremendous growth possibilities for
services and fees and let the client move ahead.

Berger ended his remarks with a word of caution: Because liability reform has made standing to sue in securities litigation more difficult, the civil justice system has become less proficient at ferreting out and correcting audit deficiencies. In his opinion, this could be detrimental to the capital market system in the long run, if shoddy work goes unchallenged.

The Role of the Independence Issues Committee. Moderator Previts brought up the apparent difficulty the ISB's Independence Issues Committee (IIC) was having in dealing with the issue of independence and alternative practice structures. In a recent meeting, the IIC, which operates much like FASB's Emerging Issues Task Force, reached a consensus that neither Arthur Siegel (the ISB's executive director) nor W. Scott Bayless (SEC associate chief accountant) could accept. In response, Bayless stated that it is the role of the IIC to interpret existing independence rules and regulations and, in his view, the IIC was going beyond interpretation into new ground. It was on this basis that he objected to the conclusions reached by the IIC. Bayless went on to say that issues in the alternative firm structure discussion will rise to the ISB level, where exposure and due process will operate. Siegel agreed with Bayless, saying that he had hoped the IIC could deal with the issue within the existing framework. Solutions from the board, with its due process, are inconsistent with quick, practical guidance, he said.

Appearance vs. Fact of Independence. Previts asked Robert K. Elliott to present his view on why too much weight should not be given to the appearance of independence over the fact of independence. Elliott drew an analogy: Would the passenger on a plane prefer that the mechanics on the tarmac be neatly and smartly uniformed or that the engines be properly overhauled? There is no problem if the fact of independence and appearance of independence are confluent, but what happens when an auditor who is in fact independent does not appear to be so? Elliott's conclusion was that it is more important to have a system in place that provides assurance about the fact of independence than to worry about "subjective" appearances, about which a complete conclusion is impossible
to draw.

The Theoretical Cost of Independence. Previts invited Elliott to comment on how cost-benefit issues should factor into the discussion. Elliott began by noting that an official definition of auditor independence does not exist, but that its place in financial reporting is absolutely critical. Auditor independence creates value for investors and creditors, and, as a result, firms have tremendous market incentive to maintain independence in fact. Elliott said that an independent audit has proven economically optimal where there is a moral hazard implicit in dealings between an absentee owner and a manager. Because it promotes an optimally economic arrangement, the audit has thrived in the marketplace. He noted that 96% of NYSE companies were audited even before the SEC enacted mandatory audit requirements.

"If audits were free, we could demand that auditors be completely and absolutely independent," Elliott said. "For example, auditors could be selected at random from a pool of qualified auditors, paid for by the government." But audits are not free. There are degrees of independence: the greater the independence, the greater the cost.

Elliott observed that when the SEC established its independent auditor requirement, it knew that the client was paying the fees and that in many cases the auditor was doing substantial amounts of work in addition to the audit. The SEC decided to leave those impairments to independence in place because, in its view, they did not create substantial bias to warrant change.

ISB's Conceptual Framework. Previts asked Arthur Siegel to comment on the ISB's conceptual framework project. Siegel reported that Professor Henry Jaenicke of Drexel University has been engaged as project director and will be assisted by Professor Alan Glazer of Franklin and Marshall College. A broad-based task force comprised of accountants, directors and officers of companies, user groups, and academics has been formed to act as a sounding board. Siegel said that the ISB staff has developed an outline for the framework, starting with why financial statements are important, proceeding to a discussion of the issues, and ending with a definition of independence.

"We hope it will do the same thing for us as FASB's framework has done for it," Siegel said. "It will constrain and limit discussion, while at the same time provide a common language for presenting the issues and objectives of proposed standards." He said the timetable calls for a final document in two years, with discussion memoranda and an exposure draft to be issued along
the way.

Siegel noted that, in devising the conceptual framework, the ISB will have to address two prevalent operational theories of independence. The first, modeled after the drug and airline industries, depends upon a behind-the-scenes regulatory scheme to monitor and protect the public. The second approach depends upon full disclosure, allowing users to decide what risks they are willing to take.

Implications for Nonpublic Companies and Their Auditors. Moderator Previts asked Sally L. Hoffman, then a member of the AICPA Professional Ethics Executive Committee and now a member of the ASB, about the relationship between the ethics committee and the ISB. Hoffman noted that the ethics committee has jurisdiction over all AICPA members and that nonpublic companies and their auditors are a major part of the economy.

"We don't want to have two sets of rules," Hoffman said. "The goal is harmony." It is the committee's objective, however, to respond to all the issues that face the profession. Hoffman went on to note that the emergence of alternative practice structures, which affect primarily nonpublic clients, is an example of a current practice issue that the ethics committee is attempting to resolve. At a recent meeting, the committee finalized guidance on the responsibilities of the various players involved. The SEC may add its comments to the guidance, but at least practitioners will have some direction, she said.

The Preparer Community's Point of View. Moderator Previts observed that the financial statement preparer community--meaning the companies themselves--has not been very active in the public commentary on auditor independence. Union Carbide CFO John K. Wulff, who also chairs the Financial Executives Institute's (FEI) Committee on Corporate Reporting (CCR), responded that the preparer community values the audit, not just for its role in adding value to capital markets but also in initiating a healthy dialogue and interaction with company management.

"It is not always smooth," Wulff remarked, but the input generated by an audit is critical to running an effective organization. He went on to say that audit quality is contingent upon competency and objectivity and that objectivity is contingent upon independence. He is concerned that independence is often discussed in isolation when, in reality, the larger issue is audit quality.

According to Wulff, it is dangerous to address preserving the appearance of independence and not address the fact of independence. Following that road will lead to decisions that don't account for increased costs and other implications. For example, restricting someone's freedom to leave public accounting to work for a client may reduce the profession's ability to attract high-quality entrants. A.A. Sommer, Jr., concurred: "On the issue of sanitizing a former employee before he or she can join a client, I am not an enthusiast.
I agree that this would have a chilling effect."

Wulff noted that FEI's CCR is very supportive of audit quality and independence issues, but that doing things for the sake of independence alone may not be the solution. CCR would like to see more analysis of the root causes of audit failures.

"We don't see enough of what went wrong," Wulff said. "Did an audit failure arise because of a lack of competence, or was independence an issue?" Root cause analysis would help the decision-making process.

Prohibit Nonaudit Services. Elliott noted that prohibiting nonaudit services by auditing firms is not without cost. Firms might have to pay more for talent that would have reduced employment options, and the benefits of multidisciplinary interaction and the cross-fertilization of ideas might be lost. He pointed out that there is not a single documented case in which providing nonaudit services caused audit failure. In his view, improving the quality of information should be the main thrust of most nonaudit services. Obtaining and delivering higher-quality information for use by insiders and outsiders should be the goal.

"CPAs are the people who bring information integrity in all its manifestations--including but not limited to the financial statement audit--to a wide variety of stakeholders," Elliott said. He sees no conflict between assuring the integrity of financial statements and assuring the integrity of other kinds of financial information.

Furthermore, Siegel quoted an SECPS study which found that 78% of audit clients purchased no nonaudit services from their auditors during the previous year. He said that if firms are using the audit as a loss leader, it isn't working for 78% of the audits. Wulff agreed, stating that there would be adverse implications if the auditing aspects of a firm were to be isolated from its other activities, thereby inhibiting the movement of people to and from the consulting side.

The Analyst's Point of View. Previts brought up the assumption that an analyst facing a potential auditor independence problem would walk away from the stock. He asked investment analyst Gerald I. White, representing the Association for Investment Management and Research, how the analyst would even know about an independence problem. White likened the independence issue to an onion.

"There are many levels of the problem," White said. "The very basic level would be in the area of conflicts of interest, some of which are not always obvious." In this instance, disclosure is the best answer. When looking at a company's research report, it is important, White said, to see if the firm issuing the report is also the firm's investment banker. This is a conflict of interest, which disclosure handles quite nicely. Similarly, as an analyst, White wants to know if the auditor is providing substantial other services or has other conflicts of interest.

As White moved deeper into the onion, he reached the analyst's projections of future performance. Does the push to meet earnings expectations place undo pressure on the financial reporting system? He answered yes: Pressures are placed on companies and their auditors. The projections usually relate to interim results, and he noted that the auditor requirements are weakest for interim numbers.

White opined that at the center of the onion is the failure of companies to allocate sufficient resources to financial reporting. Companies view the accounting function as a cost center, which fails to produce anything positive for the company. On top of this, they tend to dislike analysts--they don't want analysts to know what the numbers really mean. They want the numbers to be accepted without a challenge. Treating financial reporting and the audit as a cost center, according to White, leads to a compliance or "checklist" mentality. Although this deeper problem is not a matter of independence, White believes it should be considered part and parcel of the ISB's investigation.

The Role of the Public Oversight Board. Sommer was asked to explain the relationship between the Public Oversight Board of the AICPA's division of firms and the ISB. In a similar vein, Eli Mason, a member of the audience, later asked Sommer whether the formation of the ISB was an indication that the POB hadn't done its job. Sommer responded that, while the POB was formed with the primary purpose of overseeing the peer review program, it had a broader mandate: to concern itself with anything that affected audit integrity. If you have a perfect peer review program but other factors in society undermine the audit, you have nothing. As a result, the POB has concerned itself with independence.

Sommer took note of several POB initiatives in this regard over the years, including a review of scope of services (1979) and a comprehensive study of the structure of the profession (1993). More recently, in response to problems perceived by the SEC's chief accountant--he had stated that the major firms were guilty of incredible accounting--a POB panel produced Strengthening the Professionalism of the Independent Auditor, a paper that sought to compensate for the fundamental conflict of interest wherein the client pays the auditor's fee. The paper suggested that the auditor consider the board of directors as the client and that the auditor engage in meaningful discussion with the board regarding the choice of accounting principles made by management. Sommer deemed the report successful based upon the quality of its thinking, even though the POB had no authority to mandate implementation.

And so, according to Sommer, prior to the formation of the ISB, the POB played a lead role in criticizing and commenting upon independence issues but lacked authority for rule making or enforcement. "It has only the moral authority to comment," Sommer concluded--something more than moral authority is needed. "The ISB now has the responsibility, and we expect to cooperate with them."

Rotation of Auditors. Mason also asked panelists whether the rotation of auditors might be a way to shore up auditor independence. Siegel responded that the ISB would consider the issue as part of the conceptual framework. As a former audit partner, he said that rotation was more expensive but could provide significant benefits. He noted the risk, however, that new auditors might not fully understand the company's operations.

Elliott added that audit failures often occur in the first year or two of a relationship. He also asked that those who favor rotation weigh the incentive effect of mandatory rotation. The audit firm that must replace its entire portfolio every three, five, or even seven years, may not wish to earn the reputation of a tough, play-by-the-books enforcer. The firm might seek to be known as a more compliant player, in order to attract clients. Sommer said that the idea of rotation of auditors has come and gone because the negatives outweigh the positives.

The Next Steps

There is no disagreement about the importance of auditor independence. Plans are being drawn up as to how the public can be assured that independence exists. All eyes are on the conceptual framework, in the hope that it will resolve the current differences in opinion. Progress in preserving and strengthening auditor independence will require the open minds and active participation of all the constituents. *

William T. Allen

Director, Center for Law and Business, New York University; Chair, Independence Standards Board

"The question of auditor independence has unhappily become a technical specialty. What is needed, however, are clear principles that can be applied broadly."

William T. Allen, chair of the Independence Standards Board, served as chancellor of the Chancery Court of the State of Delaware from 1985 to 1997. He was recently appointed director of the Center for Law and Business at New York University. He is also counsel to the law firm of Wachtell Lipton Rosen & Katz.

W. Scott Bayless
Associate Chief Accountant, U.S. Securities and Exchange Commission

W. Scott Bayless is responsible for the areas of auditor independence and auditing standards and represents the SEC at meetings of the Independence Standards Board and the Auditing Standards Board. He serves as a staff liaison to the AICPA's SEC Regulations Committee and participates in oversight of the Public Oversight Board and the accounting profession's peer review process.

Daniel L. Berger

Bernstein Litowitz Berger &
Grossmann LLP

"Without confidence that the auditor acts independently of the client, investors in the financial markets cannot comfortably rely on financial information necessary to make their investments."

Daniel L. Berger is the partner at Bernstein Litowitz Berger & Grossmann principally responsible for the firm's discrimination practice. He was co-lead counsel in Roberts v. Texaco Inc., one of the most significant discrimination suits ever filed. Berger also has litigated many of the firm's high profile securities fraud cases. He is a member of the faculty of the Practicing Law Institute, where he lectures and writes regularly on accountants' liability, securities class actions, and employment discrimination.

James L. Cochrane

Chief Economist and Senior Vice President, Strategy and Planning, New York Stock Exchange, Inc.

"Searching for a comprehensive, operationally useful definition of an 'independent' director might be intellectually interesting, but it may be more useful to provide some reasonable tools to help ensure that 'independent' directors on audit committees can do the job the shareholders expect them to do."

James L. Cochrane has been senior vice president of the New York Stock Exchange since October 1988. He is responsible for strategy and planning at the NYSE and is also involved with the exchange's activities outside the United States. His most recent speeches and publications involve global integration of capital markets and issues affecting foreign companies trying to raise capital in the United States.

Robert K. Elliott

Partner, KPMG Peat Marwick LLP; Vice Chair, American Institute of CPAs

"The Big Five put a half-trillion dollar asset at risk every time they sign an audit opinion; this is a far greater incentive to maintaining independence than any rule or regulation."

Robert K. Elliott is vice chair of the board of directors of the American Institute of Certified Public Accountants for 1998­99 and will become chair for 1999­2000. He is a partner of KPMG Peat Marwick LLP in New York City and a member of its office of the chairman. Elliott currently chairs the AICPA Strategic Planning Committee and previously chaired the AICPA Special Committee on Assurance Services. He was previously a member of the AICPA's Special Committee on Financial Reporting and Auditing Standards Board and the SEC's Advisory Committee on Capital Formation and Regulatory Processes.

Sally L. Hoffman

Member, Auditing Standards Board

"Globalization, the changing landscape of the financial services industry, and the acceleration of change require new approaches to defining and assuring auditor independence."

Sally L. Hoffman is partner in charge of litigation services and technical standards at Perelson Weiner in New York City. She has serviced a wide variety of commercial and not-for-profit enterprises, including Fortune 100 clients and private companies in diverse industries. Hoffman recently completed a three-year term on the AICPA Professional Ethics Executive Committee, and is now serving on the AICPA Auditing Standards Board. She is a former member of the AICPA Accounting Standards Executive Committee.

Gary J. Previts

Associate Dean of Undergraduate Programs, Case Western Reserve University

"Audit independence means integrity and objectivity ... this is not a revelation, but a recitation of the view held by past and present leaders of the profession."

Gary J. Previts was appointed professor of accountancy at Case Western Reserve University in July 1979 and served as chair of the Department of Accountancy in the Weatherhead School. Currently, he chairs the Financial Ethics Committee of the International Association of Financial Executives Institute. Previts is a member of the board of the AICPA Foundation. He is editor of Research in Accounting Regulation and recently co-authored A History of Accountancy in the United States and The CPA Profession: Opportunities, Responsibility, and Services. He has served as president of the Ohio Society of CPAs and as a member of the board of directors of the AICPA.

Arthur Siegel

Executive Director, Independence
Standards Board

"We should be able to take auditor independence for granted in the same way we take for granted the safety of our food and water."

Arthur Siegel is currently the executive director of the Independence Standards Board. Previously he was a partner at Price Waterhouse and served as vice chair in charge of their audit practice. Siegel chaired the SEC Practice Section Executive Committee from 1994 to 1997, served on the committee to review activities of EITF (Emerging Issues Task Force), and was a member of the Financial Accounting Standards Advisory Council.

A.A. Sommer, Jr.

Counsel, Morgan, Lewis & Bockius LLP Counselors at Law; Chair,
Public Oversight Board

"Independence is the absolutely essential ingredient to the value auditors bring to our society."

A.A. Sommer, Jr., presently counsel to Morgan, Lewis & Bockius LLP in Washington, D.C., had been a partner of the firm from 1979 to 1994. Sommer is presently chair of the Public Oversight Board of the AICPA; a member of the American Bar Association's Federal Regulation of Securities Committee; chair of the Committee on Corporate Governance of the Section on Business Law of the American Bar Association; and deputy chair of the Capital Markets Forum of the International Bar Association.

Richard H. Walker

Director of the Division of Enforcement, U.S. Securities and Exchange Commission

"Investors know that they can trust our auditors because they are--and of equal importance--they appear to be independent. It's not enough that audit quality is maintained and that the numbers are right. It's also necessary that public investors--the users of financial reports--perceive that the numbers are right."

Richard H. Walker was appointed director of the Division of Enforcement of the U.S. SEC on April 8, 1998. For over two years prior to his appointment, Walker served as the SEC general counsel. He was awarded the Presidential Rank Distinguished Service Award in 1997, the highest federal award for government service. He also received the SEC's Law and Policy Award in 1997 in recognition of his participation in the government's victory in United States v. O'Hagan, in which the U.S. Supreme Court upheld the misappropriation theory of insider trading.

Gerald I. White

President, Grace & White, Inc.; Association for Investment Management and Research

"An auditor who is not independent is no auditor at all."

Gerald I. White is president of Grace & White, Inc., an investment counsel firm for individual investors, and a chartered financial analyst. White was an adjunct professor of accounting at New York University's Stern School of Business from 1978 to 1995 and a member of the Financial Accounting Policy Committee of the Association for Investment Management and Research, chairing it from 1976 to 1987. White co-authored The Analysis and Use of Financial Statements, second edition.

John K. Wulff

Vice President, Chief Financial Officer,
and Controller, Union Carbide Corporation; Chair, FEI Committee on Corporate
Reporting

"Independence is central to audit quality and, therefore, should be proactively supported by everyone involved in the financial reporting process."

John K. Wulff began his career with Union Carbide in 1987 as deputy controller of the corporation, and was elected vice president and controller in 1988. With the formation of a Union Carbide holding company in July 1989, Wulff was also elected to the position of principal accounting officer. He was named chief financial officer in 1996. He is chair of the Committee on Corporate Reporting of the Financial Executives Institute. He also serves on the Finance and Audit Committees of Danbury Hospital.